Before we go over the step-by-step guide on how to pay off debt, I need to say: I believe that nothing in life is more rigged against an individual’s finances than debt.
Once you get in that financial quicksand it can turn bad real quick if you don’t track your numbers. If you have some consumer credit debt, you need to address it ASAP. Taking this debt free quest may be a long road for some, but it is worth it.
Your emotional, financial and mental future self will thank you for doing this.
So let’s get into our complete and exhaustive walkthrough on how to pay off your debt.
Stop Looking Away
Admitting to yourself that you need to focus your personal debt and acknowledging that you it is a priority is the first step. If you’re reading this, congratulations! You are on the right path.
Many people spend a long time denying their situation. They can go months without looking at their credit cards statements, and they just dread the moment they will have to deal with it later on. They’re just not ready.
Sadly, the longer that period of denial is, the worse the situation will be when they finally open their financial pandora’s box.
Know The Size Of Debt You Are Dealing With
So now that you took action on paying your debt, you need to know specifically how much you have to pay.
This may be a difficult phase of the process because you need to face the harsh reality and look at it in the face. It is a necessary step to sort everything out. No matter how big the number is, know that it is doable if you follow the steps and stay consistent.
Do not go back to denial once you know the official number. This is a common reaction when people can’t figure out how they will pay everything off.
Make The Commitment To Yourself And To Your Loved Ones
Now you got to find the WHY you are taking on this. Is it because you want a better life with less financial anxiety?
Is it for the well-being of your kids?
Is it because you want to eventually never have to worry about money ever again?
Whatever the reason that is making sense to you, you need to find it. Write it down and place it somewhere you can see it every day. You can go the extra mile and make it a vision board with a photo of your family, dream house, dream car, etc. Or you can create a set of affirmations describing what you envision of your financial future that play back when commuting. No matter what you do, make sure you take the time to know what fuels your drive to be debt free.
Set Yourself Up For Success
Tell your friends what you are about to achieve. It may sound intimidating, but do not fear. You may find out that some of your friends and relatives are in similar situations.
Maybe you will wake them up of their denial phase!
One sure way to get started is to join an online community. The obvious place to look for an online community is on Facebook. You can find debt relief groups on Facebook where people can share what they are going through on their journey and exchange tips and support. I strongly suggest that you join one community that attracts you and that you get involved by sharing your experience and trying to help others.
Know Your Numbers
Now it’s time to understand what is going on in your bank accounts.
You need to know what is getting out of your bank account every month. Look at your bank statements and make sure you know what every single line is for. Figure out what expense goes in each of these 3 categories:
Fixed Expense: The amounts that are always the same and recurrent on a monthly, weekly or yearly basis (think rent).
Variable Expenses: The amounts that vary from month to month but are still recurrent (e.g. groceries)
Other Expenses: The amounts that are irregular or one time (e.g. a new laptop).
Once done, it is time to look closer at each expense.
You may notice things you are paying for nothing such as subscriptions or some over spending in some categories ( clothes, shoes, digital downloads from games, etc.).
Comb through these and reevaluate their usefulness and ultimately opt out of these services.
Now You Have To Budget
To have a clear picture of your finances, you need to budget.
There is no way around it.
Budgeting will give you a clear track of how you are doing and when you can expect to pay off all your debt.
If done correctly, budgeting can only take you 30 min to an hour per month. It can take you even less if you are willing to invest in some tools.
If you are just getting started, I suggest you go with templates available for free online. We compile a list of our favorite printable online monthly budget templates so you can get started risk free.
My approach to effective budgeting without feeling miserable is: be ruthless with not spending on things that don’t matter to you. And have more flexibility on things that you absolutely love.
I love books. I go to the library for most of my reading, but there are always some gems I want to own a copy of, so I have money allocated for it. On the other hand, I couldn’t care less about signature clothes and fashion, so I just never spend money on them.
This, over time, worked very well for me and kept me motivated to keep going. You can play with the amounts to match your interests from month to month.
Lower Your Bills
Although there are companies out there that can call your service providers and negotiate for you, I strongly suggest the DIY approach. If you don’t have time to do-it-yourself, have a look at askTrim, a renown service that can help you shave off dollars of your monthly bills.
Otherwise, getting your hand dirty and calling each service provider to negotiate your rate is what I recommend.
To make the best out of it, just make sure you know before calling what your current plan contains and what part of your plan you are okay in letting go. Knowing what the competition is offering can also be a plus, as you show that you have done your research and you are serious.
Is there any bills you’ve been paying for years without thinking about it? You could get a lower price for, and sometimes even find free plan alternatives for. Here are a list of the services you can most likely reduce or find a free alternative to:
Cable. With a competition that is increasing year over year, cable companies are open for negotiation if you tell them you are thinking about moving to another company. I would suggest that you cut cable television and find other less expensive alternatives.
Internet. Similar to cable, this is a very competitive business and providers will negotiate their plans to keep a client.
Gym Membership. If you are working out at a mid to upscale gym, you can downgrade to a budget gym such as Planet Fitness. Better yet, you can train at home or at the neighborhood park for free.
Music Streaming. If you are paying for a music streaming service, switch to the free plan with ads until you solve your debt problem.
Cellphone. This too can be reduced by downgrading your plan and holding on longer to your phone before upgrading.
Cloud storage. The most known cloud storage services have free plans that you can downgrade to. Also, if you have external hard drives with unused space, moving your files over would help save money.
Software. From security software such as firewalls and antiviruses, to office suites, there are a lot of free alternative out there. Just search in Google for the software followed by “free open source alternative” should lead to safe and free options.
I remember helping my friend lowering her residential alarm system by 50% with a simple phone call. She has been a client of the security company for years and never missed a payment. She just called and told them she was looking to reduce expenses and asked them if there was anything they could do.
This similarly can be done with all service providers mentioned above. All you have to do is ask.
Important note: Make sure you don’t lose sight of the goal during the call. You want to lower your bills, not to have more for the same price. Service providers will try to offer you more channels, more data per month, and see if they can get away without lowering your bill. But paying the same will not help you in freeing cash-flow to pay your debts. So don’t get distracted!
Consider Consolidation Loans
To make your debt paying goals more achievable, lowering your interest rates as much as possible can save you thousands of dollars in the long run. You can make this possible with a consolidation loan.
What Are They?
The purpose of a consolidation loan is to transfer all your higher interest rate debt and move it to this loan, which has a lower interest rate and a more manageable payment plan.
It can be convenient for people who are having a hard time tracking many credit cards and creditors at a time. It will give you the opportunity to clear your debt with many creditors who may have been insistent with calls and letters, trying to get back their money from you.
Doesn’t it sound like a great plan? Don’t go over yourself yet.
How To Make A Consolidation Loan Work For You?
To make a consolidation loan work, you need:
A high credit score to get the lowest interest rate possible. A consolidation loan is a loan first and foremost. If you cannot get a lower interest rate than your current loans, the savings potential is not there anymore.
A good source of income is also ideal if you want to show that you will pay back your loan.
Debt consolidation won’t work unless you do, so you will need to be disciplined and relentless on paying back that loan.
Without all three criteria above, I wouldn’t suggest you to get a consolidation loan.
The types of consolidation loan
Debt consolidation loans. The main advantages over the other types of loans is that they often involve a third party (a consolidation company) that will take the responsibility of settling the outgoing debt with your different creditors.
Personal loan. This is a “handle-it-yourself” solution where once you been approved on the loan, you will pay each of your creditors. It requires some extra discipline because you can allocate the loan wherever you want.
Home equity loan. To borrow on your house equity, you need to have a house with a decent amount paid on it. This also needs discipline because you could do a serious disservice to yourself if you spend that loan on anything else than paying back your creditors.
If you are not 100% percent sure of your self-control capacity with the money from that loan, I suggest that do not take the risk of the 2 last options. Get in touch with a consolidation company. They are experienced professionals that will handle the situation for you and increase your success.
I recommend you have a look at this comparison of the best consolidation loan in the US here.
What if you were not able to get approved on a consolidation loan?
Don’t be discouraged, success is very attainable without it. It just a little more organization.
Compare which debt you’re paying first.
Now you have to decide which account to pay first and which to prioritize. Two methods are very effective and popular for paying debt. First you need to pay the minimum payment required for each account and then you apply the extra money following one of these 2 ways.
The Debt Snowball. This method comprises prioritizing the payment of the accounts with the smallest balance first. The famous Dave Ramsey popularized this method. It is the best way to enjoy small wins early and increase motivation.
The Debt Avalanche. This method consists of prioritizing the payment of the accounts with the highest interest rate first. This may not be the most motivating way, but it is the most efficient to reduce the total amount of debt you will be paying.
These are 2 very popular approaches that I would suggest you use to know what to pay first. I used a mix of both methods on my debt journey. I first started to pay off the 2 lowest amounts and then moved to the highest interest accounts.
Make More Money
Now we are moving to the offensive mode!
The ultimate way to speed up your debt paying process is to put more money on them each month. After you remove the fluff expenses, negotiated with your service providers and lowered your interest rates, it’s time to find a way to make more money.
There are many ways to make money. Here are the most popular ways you increase your income quickly.
Ask for a raise. This is the simplest way and the best return on investment since it does not require any new skills or extra time. Despite its simplicity, this method requires some preparation. Interested in giving this a try? I strongly suggest you read Ramit Sethi’s guide on how to get a raise before doing anything that cannot be undone with your strategy.
Freelance work. Is your work can be done as a freelance? You can find clients on the side for extra money. Maybe your day job is not easily transferable to a freelance gig, but you may have other skills that you could do. Are you fluent in a second language? Are you good with Photoshop? Are you more of a handy person? All these different skills may be more valuable than you think to some people in need of help… and with money to pay.
Selling your extra stuff online. There may be things you are holding on to that you don’t use. Shoes, antiques, home decor, watches and jewellery can sell well online.
Better yet, you can go Gary Vaynerchuk style and hustle for the online arbitrage game. You just need to go to as many garage sales as possible to buy things people want to get rid of and sell for profit on Amazon or eBay. It can be a lot of work at first, but things will get easier as you get experience on what sells at a good profit online.
No matter where you are at, there are some creative ways to make more money. To find something you can get into quickly and generate money from, make sure to first think of skills you already acquired or that are related to what you know so you can be up to speed quickly.
If you want to know more about creative ways to make extra money, we did a complete list of all the way to earn more online. I strongly suggest you read this regularly updated article.
Control Your spending
One good way I found to filter out my unnecessary spending is to ask myself these questions when I am about to add to the cart or pass by the cash.
“What problem is this problem solving in my life right now?”
The “right now” is very important here because if you are a “just in case” type of buyer like me, you may end up saving a lot of money!
“Is it something that I already have or can have from somebody?”
Let’s say that you want to buy a slow cooker. Do you already have one? I know some of you need that new feature you don’t have on yours, but right now if you want to focus on debt, feature chasing is not good form.
If you don’t already have one, how about looking if your parents or friends have one you can borrow? If you manage to successfully find one to borrow, put the money it would cost you to buy one on your credit card. Thank me later.
“Have I thoroughly looked for coupons and discounts for this?”
If your intent to purchase is still present after the first two questions, you need to do your research for a promotion, coupon or any other form of discount.
Look for the item online through price comparison websites. Call the retail and thrift stores in your area to see if they have the item in stock. Amazon and eBay are great places to look at first. There are also Overstock.com and classified ad sites like Craigslist that can be interesting.
These 3 questions works wonder in sorting needful purchases from emotional or impulsive ones.
That’s what I call controlled spending.
How to get out of debt: Final thoughts
Congratulation on reading this far. You just shown that you are serious and willing to find a solution to your debt problems.
Now you have to take action. Go through each step and implement it in your life. It can be a long journey, but trust me, getting out of debt is a HUGE step in creating the life you want for yourself and your family.
Just imagine how much richer and worry free you will be when all your finances will be under control. How are you going to celebrate when you will pay your last cent of debt?
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Let’s make that bread together!